Unemployment or Furlough: Which is the Better Option?

June 9, 2020

The current state of the economy is leaving small businesses with uncomfortable choices. Among them is the choice between furloughing employees and laying them off so that they can collect unemployment insurance. Is one option better than the other? No.

Like most things in small business, there isn't a single solution for addressing slowdowns that result in an idle workforce. The onset of the COVID-19 pandemic has only served to highlight an issue that has been around as long as the modern employment environment. Nonetheless, there are multiple factors to consider before a company reduces its workforce.

The Main Difference

The main difference between unemployment and furlough is a worker's status. An unemployed worker is one who has legitimately lost his or her job. Unemployment can be the result of layoff, termination, or quitting. In the case of the COVID-19 pandemic, millions of employees have been laid off. They are eligible for unemployment insurance.

Furlough is different in that employees, though not still working, remain on the company payroll. In other words, they are still legally employed. They may or may not be eligible for partial unemployment insurance depending on state regulations. This is the tricky part for employers.

Though details differ from one state to the next, a general rule for partial unemployment states that furloughed full-time employees are eligible to receive partial unemployment benefits if their work hours have been reduced by at least half. Employees cannot receive full benefits while they remain furloughed.

Maintaining Health Insurance

The partial benefits aspect of unemployment insurance law is one of the reasons some employees choose to layoff rather than furlough. They would rather lay off and allow employees to collect full benefits. On the other hand, there is the question of maintaining health insurance and retirement benefits.

Furloughing allows a company to keep health insurance benefits intact. Both employer and employee still pay their portions of the premiums. In some cases, furloughs may trigger COBRA benefits paid entirely out of pocket by employees.

Employers unable to continue making health insurance payments may choose to layoff instead. Doing so allows affected workers to collect unemployment and either go the COBRA route or search for subsidized health insurance on one of the federal exchanges.

Bring Employees Back

Financially speaking, it is more attractive for many small businesses to lay off affected workers and then rehire them once business returns. However, such a strategy does have its drawbacks. Employers wishing to avoid the hassles of rehiring may choose to furlough instead.

When you rehire, you are basically starting over from scratch. There is a bunch of paperwork involved every time a new hire is brought on board. Furthermore, benefits packages reset and start anew. This creates yet another paperwork burden.

Finally, there is the ethical question to consider. You might be a small business owner who feels morally obligated to furlough employees if at all possible. You feel an obligation to keep your workers on the payroll, keep their benefits intact, and bring them back as soon as work warrants.

Your Circumstances Are Unique

We wish it were possible to definitively say that one option is better than the other. We cannot. We have been in the payroll and benefits administration business long enough to know that your circumstances are unique. The best advice we can offer is that you do the research necessary to fully understand both options.

Once all of this is over and business returns to normal, we will be here to help our clients get their payroll and benefits back up to speed.

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